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Sensex return of 1.2% in rupee terms in sharp contrast to FII purchase of $4.5 bn

Despite seeing one of the highest inflows by foreign institutional investors (FIIs), Indian equities have been among the most underperforming markets in the current calendar year compared to their Asian and emerging market peers.

While FIIs have net bought over $4.5 billion worth of Indian equities so far in the current calendar year, the Sensex has given returns of 1.2% in terms of local currency. The 50-share Nifty has fared worse, giving returns of 0.88%. The markets that have outperformed the Nifty include the Stock Exchange of Thai index with returns of 8.17% against FII flows of $560 million, followed by Shanghai Composite (7.23%), and Nikkei 225 (6.27%).

In contrast, Indian markets have emerged as the third best performers after Thailand and China in dollar terms. The Sensex has given returns of 4.39% from the beginning of the current calendar year. The Thai index has given returns of 11.7%, while Shanghai Composite has yielded 7.21% in dollar terms.

Surprisingly, the Nikkei 225 index has given negative returns of 1.06% from the start of 2013, despite receiving the highest amount of portfolio investment (over $9.5 billion). Recently, a Bank of America Merrill Lynch report said that the market outperformance in the second half of 2012 and the overweight position of India vis-a-vis other emerging markets continued to pose a risk to Indian equities, given the uncertainties on interest rate cycle and current account deficits.

The report said that China posed a near-term possible risk to India as fears of hard landing in world's largest second economy have abated. Swiss major Credit Suisse, on the other hand, raised doubts over whether Indian markets were in an overbought territory, highlighting that investors were concerned about the risk of a tactical correction.Market experts attributed the recent underperformance in Indian equities to selling by local or domestic institutions. Data show that while FIIs have net bought $4.5 billion worth of Indian equities, domestic institutional investors (DIIs) have sold a little over $3.4 billion worth (R18,000 crore) of Indian equities since the beginning of CY13.

DIIs continue to remain on the selling side due to redemption pressure because of the recent rally in Indian equities while participation from retail investors has remained stagnant.

Domestic institutions have taken advantage of the rally to redeem their positions and book profits. Further, retail participation is not huge and brokerage volumes have been more or less stable, which explain why the Indian markets have underperformed the peers, said Vinay Khattar, vice-president, head research, Edelweiss Capital Markets. Experts said India is in a consolidation mode after a sharp rally last year. The Sensex is trading at 16 times P/E, but corporate India's earnings expansion will play out in 2-3 quarters. The market has to see real economic traction, such as increase in consumption and infrastructure spending, to sustain the rally, said Khattar.